Oct. 25 (Bloomberg) -- With growth stalling, Chipotle
Mexican Grill Inc. is mulling changes that threaten to turn the
burrito chain into what founder Steve Ells said it would never
be: another fast-food joint.

Ells, a classically trained chef, built a cult brand by
wowing diners with a tightly edited menu of sustainably sourced
food and helped pioneer the “fast casual” category.

Hewing to that vision is getting harder. Last week, the
Denver-based company reported profit that trailed analysts’
estimates amid slowing same-store sales growth. After the
results, Ells suggested strategic changes one might expect from
his counterparts at McDonald’s Corp. or Burger King Worldwide
Inc. They include running more commercials that drive traffic
rather than celebrate the brand, and possibly adding breakfast
items and installing drive-through windows.

The proposed changes recall what happened when Starbucks
Corp. began brewing bagged coffee instead of grinding beans in
front of customers in stores, losing the fresh coffee aroma,
said Kevin Lane Keller, a marketing professor at the Tuck School
of Business at Dartmouth College in Hanover, New Hampshire.
Starbucks later returned to grinding.

“You have to be careful of the death by a thousand cuts,
where you’re making a series of decisions that might have little
compromises” and aren’t consistent with the brand, said Keller,
who has written about Chipotle in a textbook.

While Chipotle’s new Mexican-themed food might work, Keller
said a drive-through gets away from the chain’s signature
production-line service, in which counter staff build burritos
to customers’ specifications.

“You lose the experience,” he said.

Struggling Chains

In the wake of the U.S. recession, chains such as
McDonald’s and Chipotle continued to boost sales. Now,
restaurants including Chipotle are starting to struggle and some
are stepping up advertising and adding new menu items. After
last week reporting the slowest U.S. same-store sales increase
in 11 quarters, McDonald’s said it would increase its Dollar
Menu marketing to draw cash-crunched consumers.

While the Standard & Poor’s 500 Restaurant Index gained by
at least 14 percent annually in the past three years, the index
has slumped 6.2 percent this year as higher gas prices squeeze
Americans’ paychecks and stall consumer spending.

Ells, who serves as co-chief executive officer, opened the
first Chipotle store in 1993. McDonald’s, the world’s biggest
restaurant chain by sales, began investing in Chipotle in 1998
and was the largest shareholder from 2000 until it spun off the
chain in 2006. Chipotle, which sold shares in an initial public
offering for $22 each in 2006, has since grown to more than
1,350 locations.

Not Pivoting

“We’ve always been very sort of focused on doing our
marketing kind of different,” Alex Spong, Chipotle’s director
of investor relations, said in an interview. “That model has
allowed us to have consistent sales growth.

‘‘While we may tweak some things here or there, I think
it’s important that the takeaway is, we’re not pivoting from our
strategy,” Spong said.

Chipotle sales growth started to slow during the second
quarter. Sales at stores open at least 13 months rose 8 percent
in the second quarter and 4.8 percent in the third quarter as
consumers pulled back spending.

On Oct. 2, hedge fund manager David Einhorn criticized the
company, saying its valuation was too high and that it will face
challenges from Yum! Brands Inc.’s Taco Bell.

Beef Controversy

Taco Bell has moved past a controversy concerning the
quality of its ground beef, and its recent higher-priced Cantina
Bell menu has helped fuel sales. Still, the chain isn’t stealing
many Chipotle diners, said Peter Saleh, a New York-based analyst
at Telsey Advisory Group. Though there is some customer overlap,
it’s not significant, he said.

“Chipotle’s core customer is more young professional, late
20s, early 30s, the person who is looking to eat a little bit
healthier,” Saleh said. “The Taco Bell customer is definitely
a younger, high-school or young, college student” who wants to
spend a little less, he said.

Chipotle also has fast-casual rivals that may be poaching
some customers. So-called better-burger chains have been
expanding in the U.S. -- sales at Smashburger jumped 72 percent
last year, while Five Guys Burgers and Fries revenue rose 33
percent, according to data from Chicago-based researcher
Technomic Inc.

Einhorn Criticism

Since Einhorn criticized the burrito maker, its shares have
dropped 23 percent and on Oct. 22 traded at the lowest premium
to the Standard & Poor’s 500 Index in more than two years.
Chipotle has become less valuable to investors and trades at
about twice the price-to-earnings ratio of the S&P 500 Index,
compared with 4.3 times in April. Still, the company’s stock is
up more than 11-fold since its IPO.

“Chipotle hasn’t been a traditional advertiser,” David
Tarantino, a Milwaukee-based analyst at Robert W. Baird & Co.,
said in an interview. “They’ve chosen to allow their brand to
grow with more word-of-mouth communication.”

The company has used emotional advertising to connect with
Americans and push an environmentally conscious image -- it’s
“Back to the Start” animated video shows a hog farmer
returning to his small, family-run business roots after
experimenting with large, industrial production. In the ad,
which aired during the Grammy Awards, Willie Nelson sings “The
Scientist.” Chipotle has also given out free burritos on Earth
Day to customers carrying recycled lunch bags.

Offbeat Ads

Burger King has recently gone the way of traffic-driving
ads. Instead of offbeat ads featuring the so-called King
character, the company began using close-up product shots and
touting special deals, such $1 chicken wraps and 50-cent soft-serve ice cream cones.

While Chipotle has spent less on marketing than its peers
in the past, that may be changing. To spur sales the company
will continue its signature emotional marketing and also will
“add on traffic-driving parts to that marketing,” Ells said
during an Oct. 18 conference call with analysts. Chipotle will
spend about 1.4 percent of sales on marketing this year, while
McDonald’s ad expenses were $768.6 million in 2011, or about 2.8
percent of revenue, which doesn’t include “significant” costs
incurred by franchisees at the local level, according to a
company filing.

“I haven’t really seen anything from Chipotle that shows
anyone biting into a burrito,” said Bob Dorfman, executive
creative director at Baker Street Advertising in San Francisco,
who has worked on Taco Bell marketing.

How Cheap

Many restaurant commercials “show the product and talk
about how cheap it is” and Chipotle hasn’t done that, Dorfman
said. “If they’re having some issues with sales, generally the
trend is you move into that direction.”

Along with more advertising, the company would consider
testing breakfast foods, new menu items and adding drive-through
windows to some restaurants, Ells said during the call. Other
fast-food chains, including Wendy’s Co. and Taco Bell, have
recently added breakfast items, such as biscuit sandwiches,
sausage and egg burritos and home-style potatoes, to attract
consumers. Some Panera Bread Co. units have drive-throughs.

Americans like drive-throughs: U.S. fast-food chains
generated 24 percent of their sales that way in the 12 months
ended in August, data from NPD Group Inc. show. Breakfast made
up about 10 percent of U.S. restaurant sales in the year ended
in August, according to the Port Washington, New York-based
researcher.

“I would lean probably more toward something like
breakfast if we were looking at expanding the menu,” Ells said.
“None of these things are off the table by any means.”

Chipotle should proceed with caution because adding new
menu items and window service may complicate and slow down their
stores, Tarantino said.

“One of the things that makes Chipotle so successful is
how simple the operating model is,” he said.